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BW Real 500: The Metal Giant
In the past two years, the company established a logistics systems and started a centralised procurement process across plants, enabling the cost benefits of scale
Photo Credit : Umesh Goswami
After overcoming a choppy two years of lower capacity utilisation, lower aluminium prices and a mining policy that changed overnight, Mumbai-headquartered Hindalco is now on a firmer path to recovery.
The aluminium giant’s heavy investment (over Rs 30,000 crore) in upstream capacity is now fully operational, and prices of the finished metal have recovered sufficiently for the company to churn out decent cash-flows that would pare debt over two years, and return some of the huge shareholder investment.
In a business where input costs are huge, even a small change in commodity prices often means large swings in profitability. For Hindalco, hence, operational efficiency is now the new mantra. Says Satish Pai, MD, Hindalco, “You can’t control the commodity price. Where you can differentiate is in operational performance.
All our three green-field plants are up and running, and we are drawing on significant operational efficiencies.”
In the past two years, the company established a logistics systems and started a centralised procurement process across plants, enabling the cost benefits of scale.
It also standardised operations at each plant to manage them better. On its people front, it re-jigged its model.
Now that much of the highly capital intensive capacity expansions are done, it is chalking out a different growth strategy in downstream capacity expansions. This would double its downstream production from 1.3 mtpa (million tonnes per annum) to 2.6 mtpa at much lower costs of Rs 1,000 crore per annum over the next two years.
“As the country is growing, demand for downstream products is mounting. Forty per cent of India’s aluminium or copper is going into electric wire. Demand is rising, from packaging and transportation. There is additional margin to be made,” says Pai. Hindalco is planning to increase the presence of some of its downstream brands (Eternia, Everlast).
Margins in the downstream business are robust, which could see Hindalco adding anywhere between $100-200 per tonne to Ebitda over the cost of the metal. “Having an upstream company and a large downstream is very good for Hindalco,” says Pai.
With one of the best downstream companies, Novelis, in its fold, technology to produce some high quality products is available. Hindalco is now working on harnessing these technology synergies.
Besides, it has been looking at streamlining operations and reducing costs of production across plants. While newer plants have a lower cost of production, the company is working on technologically re-engineering some of its older plants to reduce costs.
Pai also points out that the company is working on 3Cs: customers, costs and cash. “As we are becoming more competitive, clients have the option of buying from China or the Middle East or us. So, they should see the benefit of working with Hindalco. The second is the cost because if we are not competitive on cost, every time prices of the commodity drop, it will spell trouble. Third, cash generation will allow us to pare debt.”
Another factor in favour of Hindalco is that prices of aluminium seem to have stabilised and have moved up from $1,400 a tonne two years ago as input costs have risen. “The new bottom is more like $1,550; the top may not be too high. All our efforts are now generating enough cash at these levels so that we are able to deliver quality to customers,” says Pai.
The company is geared toward enhancing production in various quality products so as to meet the demand of the local industry. “Our big goal is how to replace the huge imports of aluminium in the country,” concludes Pai.